I live in Canada. I invest with TD Waterhouse, but I believe my question is unrelated to my specific broker.

Over the course of 2011 and 2012, I invested in a mutual fund indexed to the S&P/TSX (that is, a mutual fund holding Canadian equities). I would buy into the mutual fund once or twice a month.

Early in 2013, I decided to sell a chunk of this investment. I believe that I will pay capital gains tax for my 2013 tax year. It is easy to determine how much I sold the mutual fund for, but how do I determine what I paid for it?

For example, if I bought:

100 units at $10 each in 2011, then

200 units at $5 each in 2012, then

50 units at $20 each in 2012, then

100 units at $10 each in 2012

And then I sold 300 units at $10 each in 2013. Is the cost price for the 300 units $6.67 each? Or perhaps $8.89? What rules do I use to determine this? Is my broker likely to send me a tax receipt with this cost price already determined?

@DumbCoder It isn't that simple. Information from the broker helps, but it is up to the individual to track their adjusted cost base. Consider, shares may be held in more than one account or at more than one institution. Funds with return-of-capital distributions can make things trickier than just looking at the buys & sells.
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Chris W. ReaJan 24 '13 at 18:45

Chris W. Rea, 'adjusted cost base' is what I was looking for, though the article makes this sound decidedly non-trivial. If you write this up as an answer, I'd be happy to accept it.
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ChrisInEdmontonJan 24 '13 at 19:55

1 Answer
1

In Canada, calculating the capital gain from selling a partial position is done based on average cost, as opposed to using First-In-First-Out (FIFO) or other rules distinguishing units based on date acquired. (e.g. Canada doesn't contrast "short-term" vs. "long-term" gains like the U.S. does.)

New units and old units in your non-registered accounts are all considered part of the same position when it comes to figuring the capital gains. The cost per unit you need to calculate to determine your capital gain is known officially as the Adjusted Cost Base, or ACB.

From a simplistic perspective – i.e. where no distributions were received – the ACB per unit is the average price paid (including commissions paid to acquire the shares or units.) From this perspective, and probably incorrect for a mutual fund, your ACB would be:

For typical company shares paying typical dividends, the ACB calculation would likely end there, as dividends are not a factor in the gain calculation – unless you are reinvesting your dividends.

The ACB calculation is more complicated for mutual funds, exchange-traded funds, closed-end-funds, and income trusts, due to the kinds of distributions made by such investment vehicles. Distributions are frequently composed of more than just dividends.

Fund distributions often contain components like return of capital (ROC) and distributed capital gains, i.e. when the fund itself realizes net gains on transactions in the portfolio and passes them through to you. Return-of-capital distributions reduce your ACB. Capital gain distributions increase your ACB. You don't want to be taxed twice on distributed gains, so be sure to figure your ACB correctly.

You can know if your fund issued those specific kinds of distributions by looking at the tax slips received, checking with the fund company (e.g. their web site), or your broker/advisor.

So, imagine if, in your example, you had also received $600 worth of distributions, identified as $80 dividends, $20 "other" income (e.g. interest), $450 return-of-capital, and $50 capital gains. Then, your ACB per unit would then be:

($4000 - $450 + $50) / 450 = $8.00 per unit

And so if you sold 300 units at $10 each, the net gain on the sale would be:

300 * ($10 - $8) = $600

(And your $80 dividends and $20 "other" income would be taxed separately on your return, at their respective tax rates.)